With the growing popularity of Bitcoin and other cryptocurrencies, many questions began to arise in Europe about how to declare income and pay taxes on it. Despite the apparent hesitation on the part of many governments to comprehensively regulate / legalize the sector, cryptocurrency revenues and profits are receiving special attention. Different solutions on this issue present different problems for the citizens of individual EU states.
There is no single approach to cryptocurrency regulation in the EU, and each region is no exception when it comes to taxation. The recently held G20 summit did not confirm the global consensus on the status of the cryptocurrency, and each jurisdiction is expected to make its own decisions in the short term.
In the absence of pan-European guidelines on how to account for revenues and profits generated from working with cryptocurrencies, some states follow the decision of the EU Court of Justice. A judicial institution in Luxembourg set a precedent in resolving this issue in 2015, in a case on the application of value added tax (VAT) on cryptocurrencies. Basically, then, a parallel was drawn between “virtual currencies” and money.
In line with this decision, the German Federal Ministry of Finance recently announced that bitcoin should not be subject to VAT when exchanged for fiat money. Taxation should only be applied when goods and services are paid for in cryptocurrency. According to the German authorities, exchanges can enjoy tax breaks when they trade cryptocurrencies, and mining should not be taxed. However, crypto payments from individuals are subject to the standard capital gains tax. Profits of less than 600 euros and profits from long-term assets (more than one year) are not taxed in Germany.
Several other governments have adopted similar regulations. Estonia has imposed capital gains tax and VAT on digital currency. The authorities in Tallinn consider cryptocurrencies to be used both as a means of payment and as an investment. Slovenia does not impose capital gains tax on cryptocurrency investors as digital assets are not considered part of their income. However, income generated from cryptocurrency trading, both for individuals and businesses, must be declared and taxed. The applicable rates depend on the annual income and range from 16% (for incomes less than € 8’000 per year) to 50% (for incomes over 70’000 euros per year).
The tax authorities in Denmark have announced that cryptocurrency-related companies will be taxed like any other business. According to the Financial Services Authority, individuals who trade in cryptocurrencies are not required to pay taxes. The agency has called for legislation to regulate cryptocurrency and taxation. Spain is considering tax breaks for businesses using blockchain technology and cryptocurrencies. The exact amount of exemptions is not yet known, but the ruling People’s Party has introduced a bill to encourage small companies in the crypto sector.
Awaiting Brussels’ decision
A number of EU countries are still waiting for a common European approach to cryptocurrency taxation. The Belgian government, which is home to many EU institutions, has not provided an official position on this issue. However, recent reports show tax authorities are monitoring how Belgian citizens trade cryptocurrencies on foreign exchanges. Anyone who speculates in the cryptocurrency markets is expected to pay 33% in income tax, despite the fact that cryptocurrencies are not regulated by law. A special tax office said late last year that Belgians must declare them as “other income” on their tax returns.
Bulgaria is another state awaiting leadership from Brussels. The National Internal Revenue Service has released a clarification stating that a 10% capital gains tax applies to profits from the purchase and sale of cryptocurrencies. However, their legal status has not yet been determined by the Bulgarian parliament. It remains unclear how income generated from cryptocurrency trading will be taxed.
Other EU member states are losing patience. The Dutch finance minister recently described the current regulatory framework as “under-equipped”. Vopke Hoekstra spoke of the “inherently cross-border” nature of cryptocurrency and called for a “coordinated international approach.” The Dutch government is pushing for new European rules by the end of next year, including amendments to the anti-money laundering directive that also address tax evasion.
While EU regulators are still trying to understand the cryptocurrency phenomenon, other countries in Europe have taken advantage of their status. Belarus, for example, is fighting political and economic isolation by adopting crypto. The decree, signed by President Lukashenko, introduces tax breaks and other incentives for cryptocurrency-related activities until 2023. It takes effect less than a week later, on March 28th. Whether this crypto policy will add to the government’s coffers remains to be seen.